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Barrick Gold Corporation, the largest gold producer in the world, has announced its intention to partially divest its stake in African . The divested stake will amount to 10% of the issued ordinary share capital of ABG or 13.5% of its current holdings in it. Barrick currently owns 74% of ABG.

The shares to be divested will be placed with institutional investors through an accelerated book-building process which has already begun. The company has appointed Limited, and RBC Europe as joint book-runners for the process.

Barrick has been looking to get rid of its African operations for a long time. An attempted sale to China National Gold last year failed after talks broke down over the issue of price. ABG’s operations are high-cost and the operating environment is difficult which creates unwillingness on the part of potential buyers to pay a high price. Having failed to sell ABG outright, Barrick is now attempting a piecemeal sale.

In 2013, the all-in sustaining cost of production at ABG was $1,362 per ounce of gold while the company-wide average figure was just $915 per ounce in comparison. The average realized gold price in 2013 was $1,379 per ounce at ABG and $1,407 for the company as a whole for Barrick. This represented a steep fall from $1,584 per ounce and $1, 669 per ounce, respectively, in 2012. Thus, an environment of falling prices and high costs have made ABG an unattractive proposition for Barrick.

In addition, in a bid to focus on returns rather than higher production, Barrick had announced in mid-2013 that it would divest its portfolio of all assets where the cost of production exceeds $1,000 per ounce of gold. Following up on this commitment, Barrick has sold mines in Australia and Nevada as well as its energy business for a total value of nearly $1 billion.

The costs at ABG are further boosted by expenditure on security to check thefts and protect employees against violence by the local population. Power problems are an issue. Violence in the past has led to the death of some people, thus deepening the antagonism towards the company among locals.

Earlier Attempts At Divestiture

Barrick first tried to sell ABG in 2010 but later opted to list the subsidiary on the instead. In 2012, it announced its intention to divest its remaining stake in ABG and entered exclusive talks with China National Gold, but the deal didn’t work out as Barrick’s price expectations weren’t met. Barrick then announced that it would carry out an operational review at ABG and put in place measures to improve efficiency and cut costs. The measures worked to some extent and the all-in sustaining cost declined by 17% year-over-year. In response, ABG’s stock price has risen by 66% since the beginning of 2014.

What This Means For Barrick

Barrick declined to comment on how much money it expects to earn but based on African Barrick Gold’s last traded price in London, it can hope to raise between $205-$210 million from the transaction.

ABG’s attributable production to Barrick was around 640,000 ounces of gold in 2013. If we reduce this by 10%, the production loss amounts to around 64,000 ounces or 0.064 million ounces. This is hardly significant in the larger scheme of things because Barrick aims to produce 6.0-6.5 million ounces of gold in 2014. Therefore, the impact of its valuation is negligible on account of a decrease in production. A reduction in the overall costs for the company could boost the valuation by 1-2%.